The US economy will slow this year as intended and a downturn is expected to be avoided, but the Federal Reserve needs to raise lending rates quickly, a senior central bank official said Tuesday.
“A recession is not my base case at the moment. I think the economy is strong,” New York Fed President John Williams said on CNBC.
But he said policymakers need to raise rates “quickly” to contain inflationary pressures and bring the policy rate to 3.0-3.5 percent by the end of this year.
As American families struggle amid soaring gas and food prices, the Fed has shifted into overdrive and earlier this month delivered the biggest rate hike in nearly 30 years to try to cool the economy and curb inflation.
The Fed has raised interest rates by 1.5 percentage points since March from zero, where they have been since the start of the Covid-19 pandemic, and is expected to announce another three-quarter-point hike at its July policy meeting.
That has sparked fears that the campaign to tackle the highest inflation in four decades will plunge the world’s largest economy into recession.
But Williams echoed Fed Chair Jerome Powell’s cautiously optimistic view, saying there was a way forward that avoided a contraction.
“I expect growth to slow down quite a bit this year compared to last year,” he said, with GDP growing at 1.0-1.5 percent.
“It’s not a recession, it’s a slowdown that we need to see in the economy to ease inflationary pressures and bring down inflation.”
The Russian invasion of Ukraine was a major factor contributing to soaring global food and oil prices, and Williams noted that the main risks to the US economy “come from abroad.”
He said it was “perfectly reasonable” to expect the Fed to raise interest rates to 3.5-4.0 percent next year, but that the ultimate path would depend on economic data.
“We need to raise interest rates quite a bit this year and next year,” he said. “We need to raise interest rates, and we need to do it quickly.”
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